AUD/USD weakens as investors process US inflation figures

AUD Weakens Against USD Amid Stronger Greenback

The Australian Dollar (AUD) is under pressure against the US Dollar (USD) on Tuesday, as the US currency strengthens in response to the latest American inflation data. As of now, AUD/USD is trading near 0.6677, erasing the gains made in the previous session.

US Inflation Data in Focus

The US Bureau of Labor Statistics reported that the Consumer Price Index (CPI) increased by 0.3% month-over-month in December, aligning with analyst predictions and mirroring November’s growth. On a yearly basis, headline inflation remained steady at 2.7%, also matching expectations.

Core CPI, which excludes the more volatile food and energy sectors, rose by 0.2% from the previous month, falling short of the anticipated 0.3% and consistent with November’s figure. Annually, core inflation registered at 2.6%, slightly below the projected 2.7% and unchanged from the prior month.

Implications for Federal Reserve Policy

These figures indicate that inflation is easing, but only at a slow pace, staying above the Federal Reserve’s 2% target. As a result, hopes for imminent rate reductions have diminished, with expectations now that the Fed will proceed cautiously with any policy adjustments.

Currently, financial markets are factoring in the likelihood of approximately two Fed rate cuts later in the year, while most anticipate that interest rates will remain unchanged at the upcoming January 27-28 meeting.

Fed Officials’ Commentary and Market Sentiment

The US Dollar also found support after St. Louis Fed President Alberto Musalem remarked that inflation is still “closer to 3% than 2%,” though he expects it to ease as the labor market gradually cools. Musalem cautioned that persistent inflation remains a concern, suggesting there is “little justification for further policy easing in the near future.”

However, he also acknowledged that if labor market risks materialize or inflation declines more rapidly than anticipated, additional rate cuts could be warranted.

Australian Economic Update

On the domestic front, Australia’s Westpac Consumer Confidence index dropped by 1.7% in January, following a sharp 9% fall in December, offering minimal support to the Australian Dollar.

What’s Next?

Looking ahead, investors will be watching for upcoming US economic reports on Wednesday, including Retail Sales and the Producer Price Index (PPI). Market participants will also pay close attention to comments from various Fed officials for further insight into the central bank’s policy direction.